KEY DATA: Productivity: +3.6%; Over-Year: 2.4%; Labor Costs: -0.9%; Over-Year: 0.1%/ Layoffs: 40,023/ Claims: Unchanged
IN A NUTSHELL: “The rebound in productivity is restraining labor costs and keeping inflation in check.”
WHAT IT MEANS: With wages rising, it has been unclear why inflation remains tame. One logical explanation is the rapid increase in productivity. The growth in the first quarter was the strongest in over four years and over the year, it was the best in nearly nine years. Output was up sharply while hours worked rose only modestly. The improved production of workers more than offset the moderate gain in wages. Indeed, wage increases have been decelerating for the past year and a half, even as productivity was accelerating. So much for the theory that rising productivity leads to improved wage gains.
Challenger, Gray and Christmas reported that layoff notices in April were up sharply (9%) from the previous April. So far this year, plans to cut workers have increased by thirty one percent. The industrial goods sector notices have soared this year, while retail, which is still cutting people like crazy, is doing so at a much slower pace than in 2018.
Jobless claims remained at a really low, but no longer record low level, last week. The new claims numbers still point to a tight labor market.
MARKETS AND FED POLICY IMPLICATIONS: The Fed noted yesterday that inflation was running below target but chalked it up to transitory factors. That may be true, but fears that inflation may surge are unrealistic unless the improvement in worker productivity fades. Businesses are managing to pass through only part of the productivity increases to workers, which is allowing them to keep profits rising and prices down. While firms have some wiggle room to continue raising wages, that will be the case only if productivity remains strong. If it starts easing back toward the longer-term trend, pressures on earnings and/or prices will rise. But until that happens, the Fed will have to contend with inflation that is at best, fairly close to its target and I suspect the members would not mind seeing it run hot for a while. Indeed, I suspect that one factor they believe is “transitory” is the unusually high level of productivity growth. If that is the case, I would have to agree that it is more likely productivity will moderate than remain at current levels. Thus, investors will likely have to wait quite a while before they see a rate cut. I don’t expect any easing in policy unless the economy fades significantly, which might not come until next year – or later.